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training_data/curated/text/674e7e9bec8ddc5c92e1287ede8f4103edb63ef941bf500bbffa7cb7a85760a9.txt

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+168  •   The Intelligent Option Investor
+1. As shown and mentioned earlier, when using an option, payment 
+on the principal amount of $65 in this case is conditional and com-
+pletely discretionary. For an option, the interest payment is made 
+up front and is a sunk cost.
+2. Because repayment is discretionary in the case of an option, you 
+do not have any financial risk over and above the prepayment of 
+interest in the form of an option premium. Repayment of a con-
+ventional loan is mandatory, so you have a large financial risk if 
+you cannot repay the principal at maturity in this case.
+Regarding the first difference, not only is the loan conditional 
+and discretionary, the loan also has value and can be transferred to 
+another for a profit. What I mean is this: if the stock rises quickly, the 
+value of that option in the open market will increase, and rather than 
+holding the “loan” to maturity, you can simply sell it with your profits 
+offsetting the original cost of the prepaid interest plus giving you a 
+nice profit. 
+Regarding the second difference, consider this: if you are using bor -
+rowed money to invest and your stock drops heavily, the broker will make 
+a margin call (i.e., ask you to deposit more capital into the account), and 
+if you cannot make the margin call, the broker will liquidate the position 
+(most brokers shoot first and ask questions later, simply closing out the 
+position and selling other assets to cover the loss at the first sign margin 
+requirements will not be met). If this happens, you can be 100 percent 
+correct on your valuation long term but still fail to benefit economically 
+because the position has been forcibly closed. In the case of options, the 
+underlying stock can lose 20 percent in a single day, and the owner of a 
+call option will never receive a margin call. The flip side of this benefit 
+is that although you are not at risk of losing a position to a margin call, 
+option ownership does not guarantee that you will receive an economic 
+reward either. 
+For example, if the option mentioned in the preceding example ex-
+pires in two years when the stock is trading at $64.99 and the stock has paid 
+$2.10 in dividends over the previous two years, the option holder ends up 
+with neither the stock nor the dividend check.